Bank of England’s raised cost of borrowing, from 0.25% to 0.5%, may add £22 a month to average variable interest rate loans

Millions of homeowners face higher mortgage payments after the Bank of England said it could no longer tolerate the inflation level and announced the first increase in interest rates in more than 10 years.

Despite weak growth and mounting uncertainty over the terms of Britain’s exit from the EU, Threadneedle Street increased interest rates to 0.5% from 0.25% on Thursday, reversing emergency action taken immediately after the Brexit vote.

The move will add £22 a month to the costs of servicing the average variable rate mortgage, although the recent popularity of fixed-rate home loans means it will initially affect only 43% of home buyers.

Mark Carney, the Bank’s governor, said it was time “to ease our foot off the accelerator” but sought to reassure consumers and businesses that the first increase in rates since July 2007 was not the start of a sustained upward trend.

He said: “To be clear, even after today’s rate increase, monetary policy will provide significant support to jobs and activity. And the monetary policy committee continues to expect that any future increases in interest rates would be at a gradual pace and to a limited extent.”

As things stand, Threadneedle Street is expecting two further quarter-point increases in interest rates by the turn of the decade, which would leave them at 1%.

The Bank said that the financial crisis and deep recession of a decade ago had permanently damaged the economy’s growth potential. Brexit had further reduced the “speed limit” at which the UK could operate without generating higher inflation, Carney said.

Still, the rate decision sparked sharp questions over the ability of consumers to repay loans amid rising use of personal borrowing and credit cards to offset higher prices.

Households are, in total, expected to face about £1.8bn in additional interest payments on variable rate mortgages in the first year alone, according to analysis by the accountancy firm Moore Stephens. The firm also estimates that households will pay as much as £465m in additional costs on credit cards, overdrafts, personal loans and car finance.

The Bank faced criticism for the timing of its decision due to weak readings on the economy and a lack of clarity from the Brexit talks.

The TUC’s general secretary, Frances O’Grady, said: “This is the last thing hard-pressed families need. With living standards falling, the economy needs boosting not reining in.”

David Blanchflower, a former member of the MPC, criticised the rate rise and said it would be reversed. “This is guessonomics. There is nothing in the data to sustain this rise,” he said.

Despite the prospect of higher costs for borrowers, the interest rate rise will prove a boon for savers if banks match Threadneedle Street’s increase with a jump in the interest paid on deposits. Theresa May’s spokesman said the government expected to see higher rates passed on to savers.

Some banks have already said they will increase rates on their savings as well as put up the repayments demanded from borrowers, including Royal Bank of Scotland and TSB.

The move by Threadneedle Street comes amid a squeeze on households’ living standards from rising prices, outstripping the growth in earnings, following the devaluation of the pound since the EU referendum. It hopes that will offset the increase in borrowing costs.

Carney said “the worst of the real income squeeze is ending”, adding that higher interest rates were “part of ensuring that it does not come back”.

About a third of households have a mortgage on a home, according to the Bank. In aggregate, mortgage debt represents about three-quarters of the overall stock of household debt. Fixed-rate mortgages by value have also risen significantly in recent years, to about 60% of the stock of mortgages, which the central bank said meant that the impact of the rate hike would only feed through to households gradually.

Vince Cable, the Liberal Democrat leader, said higher rates presented “a serious problem as many individuals, families and companies rely increasingly on borrowing to get by”.

There have been some signs of consumers using savings or borrowing money from banks or on credit cards to keep up with day-to-day spending in recent months. However, high-street sales are falling at their fastest rate since the height of the recession as consumers tighten their belts. Pushing up the cost of servicing debts, “will kick one of the few parts of the economy that was working”, Cable added.